Avoid This Common Seller Financing Mistake That Kills Deals

Let me give you one piece of advice. When it comes to seller carry financing, a common mistake that I see investors making, especially newer investors, is calling up a broker, calling up a seller if it's an off market property and saying, hey, I'm interested in seller carry financing. Can you help me with that? The reason I think that's a mistake is that the seller is thinking you want to do seller carry financing because you have to. Because remember the underwriting, the terms of seller carry financing are whatever the two of you will agree to. So typically the underwriting is much reduced. You don't have to have as much documentation, you don't have to have as much paperwork. You know, it's just whatever the two of you agree to. And so what ends up happening is a lot of buyers that can't get a loan that, that don't have the pieces in place to qualify and go through underwriting, they will go out and hunt for seller carry. And even criminals, you know, crooks who are, who are going to take advantage of the seller will go out and try to find seller carry financing. And so I would encourage you, as just kind of a pro tip, your most likely way to get seller carry financing is not to ask for it up front. The best strategy that I've, that I've used is I go in and I've got a letter from a lender. Whether it's a private lender like Virgil, whether it's a, you know, bank, a regional bank, credit union, whatever it is. I got a pre approval letter, I go in with my offer and I include that pre approval letter, I include whatever financing information I have based on the circumstances and later on in the process, then I say, hey, I would be open to seller carry financing. And so I'm approaching it from kind of an abundance mindset where hey, if you have seller carry financing, I think that would be great, but I don't need it. So we never want to portray needing them to finance, needing them to carry back the loan in order to make the deal work. So when you're talking to brokers, when you're talking to sellers, I would encourage you not to say I'm looking for seller carry financing because it just implies that you need it and implies that you're less credit worthy and implies that you're a higher credit risk. So go in with your pre approval letter, go in with your lender relationships or just don't mention it. And then through the deal, the back and forth on the deal, if you know they've owned that property For a long time you, you can say something like, hey, you know, if the seller is open to it, I'd love to explain some of the benefits of seller carrier financing, etc. And then in the negotiations, if there's capital improvements needed, if there's deferred maintenance, then you can mention that with the seller carry financing, I'm going to pay $5 million for this property and like the seller to carry back a loan for 300,000 for capital improvements. Now if you're paying $5 million for the property, that's an easier sell because you know that's a relatively small portion that you're asking them to carry back to cover the capital expenditures. But that's just that much less that you have to raise. So I would not advertise that you're looking for seller carrier financing. If they mention it, great. If not, I would leave it off the table until later on in the process. What is the pre approval based on? Before funds are gathered, when the offer is made? So it's going to be, if we're talking about bank financing, it's going to be based on your credit worthiness, your experience at the number one thing lenders are looking for with, with a pre approval. So there's not a deal for them to look at yet is going to be experience. And I know that's probably discouraging for those of you who are first timers. I'm just telling like it is, most of the lenders with pre approvals, they're looking for experience. How do you solve that? You have a loan sponsor or you use private money, which ultimately private money is, is basically acting as a loan sponsor anyway. You know, private lenders are usually experienced real estate investors who will kind of walk you through the deal. The private lender that I met, that I mentioned earlier, that's what he was. And so they, they end up functioning as a loan sponsor. And so that's why we encourage people, you know, get out there, do your networking, meet investors. Now if you get a home run deal and you bring it in, then there are people in our community, there are people in our investor network. We have an investor network of over 13,000 investors who will come in and sponsor loans. We have, we have a deal working right now in our boardroom where there's a loan sponsor within the community that's, that's sponsoring that deal. So that's why we say find a deal because it is easier to find a loan sponsor once you've really found a home run deal. It's like Way easier. But that doesn't mean on the front end it is a good idea to go out and network with other investors. And when I, and we've talked about this in capital raising, which I, which I teach on a lot, so I don't want to go down too far of a rabbit trail. But when I'm going out networking with investors and I'm doing my discovery call, I'm drawing them out, I'm learning about them, I'm making a mental note or a note in my CRM or my spreadsheet about the investors who would qualify to be a loan sponsor. And then when I find that home run deal, I can bring it to them and request that they sponsor the loan. So I hope that helps. Walk us through what, Nikki, what those questions are that you're spinning in your mind when you're networking. Those questions are of what would mean. Yeah, so in the training we're going to upload, I just did some training on the discovery call. And so the discovery call is ideally the first step in networking with investors. And it's 80% about the investor, it's 80 about them. So what are their goals, what are their objectives, what are they trying to accomplish, what's their why? I think that's probably the number one mistake that, that investors make as I go into, or, you know, syndicators make is I go into that networking meeting wanting to take, you know, I go into that networking meeting like, hey, I need a loan sponsor, I'm looking for a deal, you know, how can you help? Rather than going in with sort of an abundance mindset, how can I serve? And if I go and meet these investors, if I am ready to give, if I'm ready to give my time, if I've got my, if I've got my unique strategy for finding off market deals that provides a ton of value to them. And so I'm asking questions. What's important to you? Most of the time it's going to be taxes, tax reduction, it's going to be more time with grandkids, it's going to be, you know, more financial freedom, whatever that is. And so that when I do find that deal, I can aim at what their objectives are and I can actually go out and look for deals that meet their parameters. The loan sponsor that I met with last week, within our community, he was saying that like he has a very specific buy box. And so if I want to get a deal sponsor and I know a deal sponsor, I know a loan sponsor, it would be good for me to Buy something in that buy box because I can have certainty that if I find something in that buy box, that loan sponsor will fund it. The next topic that I want to talk about with alternative financing is debt transfer. So under the category of debt transfer, you have subject to, you have assumable and you have. This is sort of a hybrid, but it's called a master lease. So subject to financing. Subject to financing is when I go in and I buy a property subject to its current loan. Now, if you remember what I was just talking about with the due on sale clause, there's a bit of a risk there, right? Because if I'm going in and buying a property, that property changes hands, there's a new person on title or a new entity on title and there's a due on sale clause, then it can't that subject to can trigger the due on sale clause where now the whole thing is, is, is due. In the residential world, it's very common to do subject to without actually telling the bank that you did it. And so you go and you buy a property, you just keep paying the mortgage or you pay the seller and the seller pays their mortgage. And that's I think what you were asking about earlier, Nika. And I don't recommend that. I would only recommend doing a subject to if the bank is aware of it and you go in, you assume the loan that they already have, that's, that's the way to do it. So the way to do that, when you, when you're looking at a property, if you don't have a relationship with a seller, you can pull a report from a title company, whatever title company you're working with. It's called an owner report. Ownership and encumbrances. They're five bucks most of the time. They're very inexpensive. But they'll tell you what liens are against the property that have been filed publicly, what debts are owed against the property. And that'll give you a really good idea of if this is a good candidate for seller carry financing. And you can reach out to that lender and ask about their policy on assumable debt. Now why would you want to assume debt now? Well, because chances are if that loan was made in the last 10 years, the interest rate's lower, right? And so these days it can be very attractive to go in, have that conversation with that lender and find out what their process is for assuming debt to where you come in and now you're responsible for it. I have seen creative situations where the buyer goes onto the debt and the seller stays on the debt. Now, most sellers aren't going to be super excited about that, but if they're in a situation where they really need off the property and they don't want to pay for it anymore, then a lot of times that can be a win win scenario where you go onto the loan or the loan sponsor goes on the loan along with the seller. So subject to, if you hear anybody say subject to, that's what they're talking about. Subject to the current mortgage. Subject to the current loan. Ideally that would be assumable debt and we would make the assumption of that debt with the current lender. Another thing that I've been asked about is master leases. I don't want to spend a lot of time on this, but it is an interesting option. With a master lease, you go in and sign a lease from the seller. So what does that not do? That does not trigger the due on sale clause because the property hasn't changed hands. With a master lease, you go in and the reason it's called a master lease is, is you control that property. That is your property. You do everything you want to do on that property just as if you. Just as if you bought it. Why would you want to do that? Well, the benefit is, with a master lease, there's not necessarily any down payment. Typically the seller wants off of it for whatever reason. Too much of a headache, they want to retire, they're getting older, they have health problems, they just want to be done with it. You go in, do a master lease, and in the lease it will state some sort of a profit share. So if I take your property and the noise now $100,000 and I can get it up to $350,000, then that's 50% mine, 50% yours, something like that. So it's a, it's a very creative option. It's kind of an outside the box option. There's a lot of information about it online. I know that people have had some success doing it. The downside, of course, there's lots, but the downside is that you don't own it and you don't generally get any of the tax benefits. So it can be a way to get your foot in the door as sort of a creative option. I'm just trying to give you the whole menu of the options that exist out there. And then you may come across a situation where it makes sense. But I think that if you believe in what you're seeing online, it seems like every deal makes sense to do a master lease, and I don't think that's the case, but I can see a scenario where that could make some sense.